After graduating from a university I started my career in a famous, then Big 5 audit company.

If you work in auditing I bet you got the worst tasks and assignments during your first year at work!

Just as I did. I remember taking part in numerous inventory counts, including those who should be avoided at all cost.

What can happen in the warehouse?

Once I had to visit cold stores and count the stock of frozen veggies and fruits in the deep-freezer.

What’s so bad about it? Hmmm, try to imagine holding your pen and paper when the air temperature around you is about minus 20 degrees. Brrr! Then coming outside was like a tropical breeze, even when the temperature outside was about minus 1.

Another day my audit senior sent me to participate on the count of fixed asset in a big state-owned company. A part of its equipment was stored in a separate warehouse – these were all assets that were acquired back in the past and not used for years.

So, while I was paddling through ancient dirty machines in my rubber boots, followed by vicious smiles of the company’s employees (they did not like auditors), I spotted something interesting.

Back in the deepest tiny corner, there was one piece covered by some plastic blanket. It immediately dragged my attention. And I had an interesting conversation with a storekeeper:

Me: What is that?

Storekeeper: Ehmmm, hmmm, weeelll, it’s a new machine.

Me: Why is it here?

Storekeeper: Errrrr, hmmmm, well, we did not want to put it into use. Yet.

After some discussions with the company’s staff I found out that they invested in this expensive machine to improve some production process, but they wanted to start using it in 6 months.

They planned to keep a machine in the warehouse to avoid depreciation charges. In other words, they wanted to start depreciation at the moment of putting the machine into use.

That’s not what IAS 16 requires

I shared my story above with you to make you realize that IFRS do not use the concept of “put into use”.

The standard IAS 16, paragraph 55 states that depreciation of an asset begins when it is available for use, or when it is in the desired location and condition.

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In the situation described above, the machine was available for use, as has been in the company’s premises, did not require additional installation and was capable of operations.

You can argue that it was in the warehouse of company’s antiques and not in the actual place of production, but I’m not sure this argument would be good enough for approval of your tax authorities or auditors.

Let me give you a few more examples when “available for use” is not the same as “put into use”:

Example 1 – investment property

Imagine you bought an apartment complex in January 20X1 and you wish to rent it to some tenants.

During February and March 20X1, you paint the walls, make a few repairs and clean the house. At the end of March 20X1, the house is ready for the new tenants.

You start placing ads and negotiate rental contracts. The first tenants move in in June 20X1.

In this example:

Available-for-use date is the end of March 20X1, as the house was ready for the new tenants.

Put-into-use date is in June 20X1, when the first tenants move in and start to use the house.

Under IFRS, you start depreciating this property at the end of March 20X1 (unless you use the fair value model).

Example 2 – specialized machinery

ABC company acquired a machine for its new production line.

The machine was delivered in February 20X1. Before putting it into use, an installation and testing performed by certified technician is required.

All the work including tests were completed in April 20X1 and ABC launched the new production line in July 20X1.

In this example:

Available-for-use date is in April 20X1, as all the necessary works on the machine were completed.

Put-into-use date is in July 20X1 when the new production line was launched.

ABC starts depreciating the machine in April 20X1.

Fit in the depreciation charges

OK, so now we now that “available for use” matters.

But here’s a problem:

You start depreciating an asset when it’s available for use, but as there are no revenues produced yet (e.g. new production line has not been launched yet), the matching principle is in trouble.

In other words, you have expenses (depreciation), but not the revenues.

Many accountants automatically think about the straight-line depreciation, just as no other methods would have been allowed.

This is what I call a “fixed” thinking.

In fact, IAS 16 does permit using several depreciation methods, such as number of units, diminishing balance, or simply any method that reflects the pattern in which the asset is consumed.

Therefore, you can have zero depreciation charges in a non-production (or idle) period. Simple as that.

What about taxation?

Here, you need to look deeply in the tax rules of your country.

Many tax laws present only limited options for your depreciation methods. As a result, you might be able to choose, for example, either straight-line or accelerated depreciation method.

Or, you might not be permitted to apply zero depreciation charge in a non-production period.

As a result, tax depreciation method might not correspond with the depreciation method selected under IAS 16 and tax depreciation will be different from accounting depreciation.

What’s the outcome?

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113 Comments

If a company has, stright line basis for all machinery, please clarify is it possible to have a unit of production only for the ideling mechinery as mentioed in your example to avoid book depreciation.

Hi Joel,
that was my point – to make you aware that the straight-line basis is not always the best method for every single asset. If there’s a machine that does not produce any units, you can still adjust its depreciation based on the hours of usage – e.g. let’s say you assume your machine will be used for 100 000 hours, and in the first period, you will use it for 0 hours, then there’s no depreciation. If you assume to use the machine for 1 000 hours in another period, then your depreciation would be 1 000/100 000 x cost. Hope it helps 🙂 S.

Hi Silvia.
what if we bought a machine on the 1th November and the financial year end is on the 31st december,and we have not use the machine up to december,but it was ready for use on November 1st,all machinery is depreciated on the straight line method,should we use the straight line,but how since the is no revenue generated?,or unit of production,if so are we going to be given the unit production of that PARTICULAR machine,hence the company use straight line method?

tks silvia,pleaae clarify if a company have two different depreciation methods for tow different mechinery, does it lead to a policy change matter if we introduce this type of two method policy for machinery during the current year.

I was following the discussion and I have one query, arent all assets in same class to be depreciated on same method and rate? Can assets of same class(Eg: plant & machinery) have 2 depreciating methods?

Reez,
IAS 16 requires that you need to apply the same model to all assets within the same class – i.e. either cost model or revaluation model. However, you can apply different depreciation rates or methods to different assets within the same class, as soon as these methods better reflect individual asset’s pattern of consumption. S.

Dear Waqas,
it’s a change in accounting estimate, not policy. The reason is that you are still accounting for depreciation in the same way (in P/L or capitalize into the cost of another asset if eligible), but the amount charged each year changes. S.

Dear Silvia
first I would like to say thank you for sharing such an amazing helpful article.
as an auditor I have one question for you, you have said in your article the company can use a depreciation method which result in zero depreciation charge.
lets say xyz company has purchased a machine to replace a machine currently in use, based on IAS 16 the company have to start depreciating the new asset, if the company depreciate the same machine at different depreciation method … is not it against the consistency principle of accounting.
thank you look forward to hear from you.

Hi Yonas, it is not against the consistency, because depreciation is an accounting estimate and not policy. You can make an estimate of asset’s wear&tear (depreciation) on an individual asset basis, not for groups (although you can apply the rates to the groups if reasonable). S.

Hi Mohamed,
see, this is another systematic way of depreciation that reflects the usage of your asset and it’s fully acceptable for some kinds of assets. There is no “black or white” – it all depends on the specific asset and circumstances. Thank you for your comment! S.

What of in a situation whereby an organization that has been in existence since 2005 and there was no account prepared from the onset of the business, now i have been employed to prepare 2015 account for the organization in which assets valuation and depreciation. Advise me on the depreciation method to use, also on valuation of the assets.

Dear Ali,
IAS 16 does not specifically mention “zero depreciation charge”. However, IAS 16 par. 50 states that “The depreciable amount of an asset shall be allocated on a systematic basis over its useful life.” The systematic basis shall reflect the pattern in which an entity consumes economic benefits of an asset and paragraph 62 states that you can use a variety of depreciation methods to perform your allocation, including “number of units” – this method results in a charge based on the expected use.
And, if your expected use is zero in a certain period, that results in a zero charge. S.

Excellent article, but to complicate things even more (real life is always more complicated), let me tell you about the real case where two Big 4 companies (one was assessing the client in implementation of IFRS and we´re the auditors) have a diffrence of opinion.
Client buys huge amounts of specific spare parts (which after amendment of IAS 16 are classified as PPE), which are kept in a warehouse for a period a time (which can easily be years). Our position is that altough they are in theory available for use, we can´t really speak of use if they are not installed to the main assets where they belong as spare parts. Also from the point of associating revenues with cost, it woudn´t make any sense because the asset has not recieved any use and therefore shoudn´t be reflected in P&L. The other firm believes that as they are in a warehouse, and need no mayor updates (besides installation), the depreciation should start immidiatly.
But that´s spare parts, not “normal” PPE:)

Hi Imre,
I will dedicate the full article to spare parts, because it’s always the problem. There is no answer that fits to all cases and the spare parts need to be assessed individually.

For example – is it a “back-up” spare part (in a sense that it’s crucial to keep some machine working if something breaks)? In this case, maybe it’s reasonable to start depreciation immediately. Or, is it just a replacement part assumed to be used sometimes in the future (so not in a sense of its immediate installation in the case of breakup)? In this case, it’s appropriate to start depreciation when it is installed, and charge some or zero depreciation during idle period (it depends on whether it wears out in the warehouse or not).

So I can understand you had a big discussion because really, this is a matter of good analysis, assessmenet and a professional judgement 🙂 S.

In this case, can the spare parts be considered as inventory? Value the inventory and recognise the impairment if any. When the part is put to use, it can be classified as PPE and depreciation can commence?

Dear Ms. Silvia,
I am your fan from Vietnam. I work in real estate industry. My issue is: We established a project company, assets of this project company mainly consist of Land Use Right and Construction Expesnes of the proposed building. We will pay 100% land use right value in 2015 (pls note that in Vietnam, we own the Land Use Right only not the physical land); the construction works are about to start in 2016. The expected completion date of the building is 2019. The building will be leased out in 2019 and generate revenue since that point of time. Land Use Right Value is considered as intangible fixed asset and is amortized not depreciated, I mean there is only one method of allocation: straight line. I am stuck while preparing the forecast P&L for the project company: amortization of Land Use Right is recorded in 2015 (right after LUR acquisition) with no revenue at that time; and depreciation of investment property (the proposed building) is recorded in 2019 (right after completion)? I look forward to your advice. My huge thanks to you.

Dear Thanh,
in relation to amortizing intangibles: almost the same rules as for tangible assets apply. So, you should amortize land use right from the date when it is available for use. It would be very questionable to amortize the land use right using number of units method (and thus zero charge in some period). I understand your concerns, but that’s the rule. S.

Refering to the question from our colleague in Vietnam. Since there is no acquisition cost of land, and they cannot start the construction without it, why don’t we treat the cost of LUR as part of the cost of the project and depreciated it over the life of the building?

No, I don’t think so. The reason is that while the building’s useful life can be let’s say 40 years, LUR can be issued for less years with the necessary renewal, so I would amortize it over the validity period. S.

If we have a group of different assets like furniture , leasehold and equipments installed in retail store and the store closed for some reasons should we stop depreciate the assets or should we continue depreciation noting that the assets are not utilized but and their conditions are good

Dear Mustafa,
depreciation is an estimate – this is what you need to realize. So if you estimate that the furniture etc. will still be used after some time in the warehouse, then it’s probably appropriate to stop the depreciation, or better said – charge zero depreciation. Of course, you need to estimate its wear&tear in the warehouse, too. S.

Dear Krystyna,
I’m a bit confused with this question, but I try: yes, you can use different methods of depreciation for different assets, because you can reasonably estimate that these assets will not be used or consumed in the same pattern. And yes, you can change the method of depreciation if there’s a reason – in this case, that’s treated as a change in accounting estimate in line with IAS 8. S.

Oh yes, Isaac, it does matter. Your profit pattern over time can be totally different under straight-line method and under number-of-units method, for example. Your aim should really be to match depreciation charge with the real usage or consumption of an asset. S.

Could you please advice on the provisions of IAS 16 on differential depreciation. I mean where we have different life for different parts of a single asset. Do we have interpretations to further insights on these regard. Equally, how do asses an asset with this quality.

Femi,
I’m afraid this is a question for a separate article.
In short: if you know that there is a part of an asset that requires replacement after some time but before the end of asset’s useful life, you need to depreciate it separately.
E.g. Aircraft has useful life of 20 years, but you need to replace the seats after 8 years. Therefore, you depreciate the seats during 8 years and the rest of aircraft during 20 years (very simplistic, but you get the point). S.

Thank you for your insight as per subject matter. Please I need your opinion on this matter, am presently auditing a shipping company, that just acquired some new vessels. This is the first set of the financial statements to be audited, however, the management wanted to adopt revaluation model rather cost model. What is your take on this.

Hi Femi,
it’s a bit out of topic, but let me try: it’s possible, but quite unusual for vessels that are used in a revenue producing activity. Is there an active market for these vessels? Can their fair value be set reliably, with account to their wear&tear over time? For me, cost model is more appropriate, but again – revaluation model is an option, too. S.

Dear silvia,
Thank you so much for such insightful article.I would appreciate if you could help me out in the following case:
Our companys financial year end on 16 July every year. On Jan 20×1, Our co. Contracted a contractor for new branch construction. The contractor completed construction and related furniture & fittings on March 20×1 And was available for use from same date but due to several reasons, the contractor bill was finalized on August 20×1 only but branch came into operation since May 20×1. Please advise on recognition of fixed assets and related depreciation charge for F/Y ended 16 July 20*1?
Regards,
Narayan

Dear Silvia,
Thanks for your article.In this case,how can we allocate depreciation for particular asset,if it is not using for production process?I mean that,asset is available for use & but company is not using that asset for production process due to some reasons.Is it require to allocate depreciation from available for use?

Dear LAHIRU, i think the answer to your question is already discussed if you read answers given to similar questions. According to Sylvia, If an asset is available for use but not being used, you can start depreciation on it. In this case, your depreciation charge could be zero.

Thanks for your article and I can remember in my articles working on New Year’s Day in freezing cold rooms, stock counting frozen fish. Pens don’t work at -20c so we had to use pencils.

Anyhow. Here is another interesting situation. I was working at a company where plant and equipment was installed and production started to enable the configuration of the plant for optimal production and to clear all pre-commissioning and hand over of of the delivery certificate by the supplier to commence the warranty period.

The production was of a sub-par quality and gradually improved up to the hand over. The production was sold as scrap or discounted as low quality product, until the production quality was optimal prior to hand over. The sales did not generate any profit until after hand over.

We did not depreciate the plant and equipment until hand over of the delivery certificate, as it was not not available for use prior to then as a production plant capable of producing acceptable quality for profitable sale.

Thank you for this helpful article.
I have one question. What if a machinery is broken, and can not be used for 2 months, it needs some repairment. In this case, do we still depreciate it in this 2 months?
Thank you so much!

I am Fixed Asset Accountant , Let us assume we bout Asset 1000 & at 01 Dec 2014, this asset is available to use but we dont use it until 01 Jan 2015 , then we must calculate depreciation one month , kindly can you explain me which debit & Credit Accounts , how effect this transaction on Income statement & Balance Sheet , at the same time how can allocate overhead expenses for const center (( We dont assignee this asset for any Cost Center )) .

I am just confused in definition of Investment property and PPE as both include “rental activity” as follows:
IAS 40: “held te earn rental or ..” and
IAS 16 “held for use in …, or for rental to others, or…”

Can you please give examples on when to account for a building rented to others as PPE or Investement property?

Hi Mohamed,
in general, buildings used for rentals to other should be accounted for under IAS 40, although IAS 16 is not forbidden. It requires your judgement in fact. For example, if you use the whole building for rental to others, then it’s IAS 40. But, if you normally use some part of the building for your own admin/other purposes and you rent out some parts ocassiobnally, or you rent out just a smaller part, then you can apply IAS 16. Or, you could rent out 1/2 and use 1/2 for yourself – in this case, you apply IAS 16 for 1/2 and IAS 40 for the other 1/2. S.

Hi IFCRSL,
for me it seems logical, mainly in the situation when it’s hard to determine fair value of such a property each year (that is required for fair value model). This is also the reason why IAS 40 permits cost model. S.

In the situation above, would would it be more correct using the Fair Value Model if information to determine the value is available? or again, does it not make a difference which model you use.

So even if an investmnent property is purchased for capital appreciation is ok to choose the cost model and depreciate the property in the books? Is it not contradictory to purchgase an investment for capital appreciation and then come and depreciate it?

See, if information is available, then yes, go for fair value model. But IAS 40 still permits you to use cost model, so no, it’s not contradictory. But, if you are using fair value model, you can switch to cost model only if it results in more reliable presentation – which is highly unlikely. S.

PPE’s can also be used for providing services, supply of goods or rental purposes etc. In that case what will be the appropriate depreciation method? and do we have to charge depreciation when its available for use?

IFRS states that if you have certain property used for either or both rental income and capital appreciation (i.e. Investment property) and also for use as property, plant and equipment for production of inventory, the use of that particular property for production purpose as relative to use of that same property for investment should be weighed. In other words, IFRS requires that only a minor segment of investment property can be used as priperty, plant and equipment and still be treated as investment property. On the other hand, if the use of the property for production is significant, the property must be accounted for as property, plant and equipment under IFRS

We have purchased machinery 6 months ago but unable to install it as the facility is not yet ready. The machinery is currently lying in its original packed condition. Please advise if we need to commence depreciation

Hi Silvia,
If a machine is available for use on a particular date but is put to use on a date after that, we charge depreciation from the date it was available for use as per IFRS.
But, does not that contradicts with the matching principle as we would be charging depreciation against which there is no revenue?

Dear Mehak,
well, matching principle in fact does not exist, there’s only an accrual principle. It means that you should recognize the elements of the financial statements when they meet recognition criteria 🙂 for depreciation, you should recognize an expense when an asset was CONSUMED, and not when the relevant revenue was generated. Also, I stated above that it’s possible to charge zero depreciation. S.

I had hard time trying to grasp the concept of ‘available for use’ in determining the moment when a company should start depreciation of property, plant and equipment in accordance with IFRS. I say this because if you look at amortization inception date for intangible assets, you do not start amortization until the assets related to intangible assets are put into use. From what I learned from a CPA professor, a company should begin amortization of intangible assets only when the assets related thereof begin revenue production process so that intangible assets can contribute to revenue inflow.

So ultimately, it appears that IFRS applies two different concepts when it comes to determining when to start depreciation of propety, plant and equipment and when to start amortization of intangibles.

I want to ask about asset depreciation with double declining method. Assume there’s an asset with value 600 USD and 5 use-life years. On the 3rd year there’s another asset addition with value 30 USD.
Is it possible to merge second asset addition with the first asset addition that affect asset cost and remaining use-life years ?
(Ex:so it will become 630 USD and 3 use-life years remaining)

and how to calculate the depreciation if possible with double declining method ?

I would like to clarify about the ready to use when we calculate the depreciation. I think that completion date is better than the usage of ready to use because we are confusing finding on the ready to use. For example,when construction of building, building was completed on 1 April 2016 but we are waiting certifying from government official to live safely in this building. Government officials certified to use this building on 30 June 2016 after inspection. What i understand is ready to use is certify from government officials, 30 June 2016. But when we calculate the depreciation, we are used to calculating the depreciation based on the completion date, 1 April 2016. Let me know what i concept is something missing. I would like to appreciate if you could explain and comments on my discussion point.

Hello, well, if you cannot use the asset before you get certification from the government, it is not ready to use. Therefore, you should start depreciation after you get certification, that is on 30 June 2016. S.

Please clarify, do you mean it will only effect if company is following straight line method of depreciation. As in units completion method, if asset is not put to use it would not produce any units, so no depreciation until then.

Dear Jane,
I would rather think about an impairment of that building, or even derecognizing it if it is not expected to bring future economic benefits. And yes, depreciation should definitely stop, because it does not reflect the pattern of how the asset is spent to receive economic benefits. S.

Dear Tarun,
the question is whether the machinery is really available for use if without FDA approval it’s not possible to use it. I would say that either way you look at it, you can make 0 depreciation charges in the waiting period, because this exactly reflects the pattern of consuming the asset. S.

please i need your clarification in this scenario.A building has been in use for the past couple of years but in the accounts was not being depreciated for all those years, now a new auditor comes in and says that the asset has to be depreciated.My question is, should be asset be depreciated in retrospect and on what value?, the historical cost of the building or the current market value?Would appreciate your insight on this. Thanks.

Dear Chinenye,
it seems you made an accounting error. IAS 8 says you should correct it in the period when it arose. In your case, you need to correct it in the past and restate comparatives too. You should work out the numbers as if the building has always been depreciated – it means using historical cost and depreciation. If you correct it in 2016 (@31/12/2016) and you made a mistake prior 2015, then you can book cumulative error correction on 1/1/2015 (opening of a comparative period). S.

I have a question. If a building is completed December 1st and the fy ends December 31, do I depreciate it for 1 month? I was updating the footnotes and I reduced the beginning balance of Construction in Progress by $500,000 for capital assets not being depreciated but the completion cost was 1,000,000. Therefore, I added that million under capital assets being depreciated. However, I am concern that the building wouldn’t be depreciated until January.Can you clarify this for me?

Hi Diane,
as soon as your building is available for use, you should start depreciating in line with your depreciation policy. So, if your policy is to depreciate straight line, then yes, you should charge a depreciation expense in December 2016. S.

in that article you wrote this;
1-If you keep the spare part to ensure smooth operation of some machinery without interruptions, then the depreciation period should start immediately.
The reason is that such a critical spare part is available for use immediately when an original part in the machine stops working.

2-However, if you keep the spare part to be used as a replacement part at some future time and you are sure that this part will be installed and put into use at a later date, then the depreciation should start when the part is installed.

my question is:
why should we depreciate the spare part immidiately(before its installation)in the first scenario but do not depreciate it in the second one?
would you please explain me the the differences between these tow scenarios?

Dear Juve,
the reason is that without the critical part, you would not be able to operate the asset. Imagine back up electricity generator in hospitals, or something like that. As the asset needs that part for its operations, also that part must be depreciated along with the asset. S.

Your explanation is very clear and easy to understand.
Could you please help me to resolve the issue I have encountered. Here is the situation. We bought tooling and started in use from March 2017.
However, for some reason, we haven’t received the invoice yet.
We agreeed the price in the written purchase order and contract and inspection completed. Since production has been started, we want to start depreciation on the tooling from March by accruing. However, our chief accountant stop us to start depreciation ( of course not allowed to accrual too) since we haven’t received the invoice yet. I cannot understand why the chief accountant saying so. Could you please explaine me?
I would very much appreciate your support.

I would like to share with you a scenario that
our FY closing date is 30th June.
On 1st July 2016 we bought a machine for $100,000.
On 1st January 2017 we add another part of $25,000 on it.
On Straight line methods should we charge depreciation on $100,000 from 1st July 2016 and from 1st January over $125,000 or we will charge depreciation on $125,000 from 1 July 2016?????

Hi Shahzad,if the machine was available for use on 1st July 2016, then you need to start charging the depreciation from that date. You can’t depreciate 125 000 from July 2016, because your cost was just 100 000. If you apply straight-line method, then depreciate 100 000 until Jan 2017, then add 25 000 to the carrying amount (100 000 less depreciation for 6 months) and depreciate the new carrying amount over the remaining useful life. S.

Silvia, congratulation for your excellent job. Please, Could you help us to clarify about IAS 38? Before selling a new product we have to get a license from government and only after that to put on marketable, This license is very expensive and we have to renew again each 2 years, without that authorization we can’t sell the products. Shall we recognize as Intangible assets or as an expensive ?
Thank you very much!!!

I started following your lessons about two months ago since i have just joined my Accounting profession works. About the same issue, if we bought a machine in February and it was actually imported in June and it was available for use in around June 12th. But my year ends 30.June . Do i still depreciate the machine for the remaining days. If yes using which method and for what period.

My company bought an ERP software about 5 years ago. At the time of purchase, the software was accounted for as Work-In-Progress because it was related to some construction projects. The software had since not been placed in use. We are now contemplating on removing it from WIP and start amortizing it even though we are not using it yet. Is it right to do that now? what can we do necessary?

Hi Madam: (instead of calling you by name, I would say you Madam/Miss, showing respect for a teacher 🙂 )

A few days ago, I was on an assignment working as an auditor. My client depreciated its imported vehicle from April 2017 to June 2017 for the financial year 2017 (Their depreciation method was reducing balance and on monthly basis). When I checked the registration paper, I got a point as the vehicle was registered on May 2017. So, the depreciation should be started from May instead of April. As the asset was available to them on April but it was “available for use” from May. As no commercial vehicle can run on road without registration from any country authorities.
At end, they got my point and said do what you want, with a smiley face. 🙂

Hi, i want to know when we need to stop depreciaion, example case if vehicle got accident and fully damage and applied for claim in insurance. when we need to stop depreciation once got accident or until we get claim from insurance or until it fully removed from our premises? please clarify

Highly sophisticated Machine is required to be kept inside the freezer before installation. Company started paying rental charges immediately on import till its installation at a separate location. In total around 12 months rental paid. Can we capitalize this rental charges

With my little understanding, we start depreciating only when we have started using the asset. so back to your question, you will need the place (venue) before you start your operation so depreciation cannot start until operation start.
kind regards
Emma

Dear Silvia, there is one situation i am trying to get the answer . One of the machine’s part was broken. The company couldn’t buy the part for this machine for some reasons and therefore the company haven’t used this machine for about 2 years. So does the company depreciate the machine during this 2 years when it wasn’t in use?
Thank you in advance

Hi
An asset depreciated straight line method with a EUL of 10 years. It completed 6 years and depreciated for 6 years. Then temporarily shut down for 2 years due to poor output. The depreciation also ceased during this two years, Now the asset is resumed after two years,
a. was it correct to stop depreciation during these two years?
b. Are we to charge balance 4 years depreciation equally for the next 2 years as a solution?
c. Can we extend the EUL by two years as the asset was idling for two years
Thanks
Hazar

Hi Hazar,
depreciation is an accounting estimate and you should revise it each year. Naturally, when you stopped the operation of that asset for 2 years, you should have revised your accounting estimate, too and reflect the changed pattern of asset’s usage in changed depreciation (did you think about the impairment, too?). As to useful life – are you going to use that asset for 2 year longer? Then of course, change its useful life. S.

Thanks Silvia for your valuable advice. Unfortunately they did not revive their accounting estimate nor considered impairment. They are not sure whether asset is going to be used for another additional twp years. More likely it will be retired as per the original EUL. In that case, I believe that we need to depreciate the balance within next two years end of which the assets will be retired

First of all I would like to say thank you.😊You are doing great work,i’m really interest to read your articles & please continue it as long as use can.

I want to clearly get idea about following,

As per IAS 16 we need to depreciate assets not at ready for use, but when the assets are available for use.

Assume that, A & B are companies which operate in same industry. Both companies purchased machine called “X”.Both companies SOFP represent the cost of the asset as 100,000$.(lets assume asset can be use 5 yrs & asset can use to produce 7,500 units).Company A use Straight Line method for Depreciation & Company B use unit of product method for depreciation. Both companies acquired the machine on 01-January-2017 (Assume year end on 31-December-2017).Both companies assets are available for use on 01st January 2017.But Both companies not use asset yet.As per the above scenarios extracts of the financial statements as follows(as at 31-Dec-2017),

As per the above scenario Company A’s effect on PBT is -20,000$ & B’s effect on PBT is 0.00$.Company A’s profit reduce by 20,000$, because of the method they use for depreciation.is this correct ? or is there any other way to present financial statements.If this happen intended uses may get completely incorrect idea about company A.Please help me to solve this matter.

A new factory is under established and one A/C unit installed, amount 2MM but still operation not started.
1. Shall i record as an asset and start depreciation.
2. Shall i have to just record asset under construction once factory will be established i have to record as an asset as whole (Factory cost+Air condition unit cost)

Thank you Silvia for your explanation,However I wanted some clarification on unit of production method,You said that when an asset is available for use but it hasn’t been put to use yet then depreciation is zero but Depreciable amount divided by units produced does not equal to zero.

Julius, using the units of production method does not mean that you need to book the depreciation for that particular year on a straight-line basis. Let’s say your machine with cost of 2 000 will produce 1 000 units: year 1- 0, year 2 – 500, year 3 – 500. Thus you book 0 in year one (0/1 000*2 000), 1 000 in year 2 (500/ 1 000*2 000) and 1 000 in year 3 (same as year 2). Some companies have an automatic booking of depreciation based on the machine’s real activity. S.

Hello Silvia. When I was an audit senior at one of the Big 4 or 5 audit firms, I had the chance to be involved in an inventory count in a fish factory in Argentina, and the count was inside a minus 20 celsius huge freeze chambers. Just like your first comment of this article! In fact, such experience provided me the idea of an insertion in my blog https://relatoscontables.blogspot.com , a blog with anecdotes of accountants. You can see there “El pasado del futuro” and “El pasado del futuro II” where an auditor is frozen alive in middle of an inventory count, and is brought to life some 30 years later or so. Many thanks for your very interesting articles and your kndness of sharing them with us. Best regards.